Law Firm Relying on Factually Incorrect Debt Figures from Servicer May Be Liable Under FDCPA

A decision in late December 2015 from New Jersey, albeit unpublished and therefore lacking precedential value, explores the risk a law firm takes when it relies, without performing due diligence, on information provided by its loan servicer client as to both the types of fees and costs the servicer claims the borrower owes, as well as the amount owed.  In Psaros v. Green Tree Servicing, LLC, 2015 WL 9412922 (U.S.D.C. D NJ December 21, 2015) the issue was whether the “Certificate of Diligent Inquiry” the firm filed in connection with a foreclosure proceeding, and which included in its recitation of the debt owed certain premiums for force-placed insurance wrongly debited to the borrower’s account, was sufficient to support an allegation that the firm violated 15 U.S.C. § 1692e(2) so as to justify the court’s denial of the firm’s motion for judgment on the pleadings.   

§ 1692e provides, in part:

False or misleading representations. A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

(2) The false representation of—

(A) the character, amount, or legal status of any debt; or

(B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt. 

In Psaros the District Court found plaintiff stated a claim when he alleged his loan did not include an escrow for insurance, his insurance was current, and he had provided a copy of his insurance certificate to the servicer, and declined to grant the law firm’s motion for judgment on the pleadings, because a demand made for funds not owed and fees not incurred is a false representation of both the character and the amount of the debt, as proscribed by § 1692e(2)(A).  Relying on the recent Third Circuit decision in McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240, 248 (3d Cir.) cert, denied, 135 S.Ct. 487 (2014), the District Court adopted the reasoning that “[a]s the drafter of the Letter, [the law firm] is responsible for its content and for what the least sophisticated debtor would have understood from it.”  Psaros at *6, citing McLaughlin at 246.  The District Court observed that Kaymark v. Bank of America, N.A., 783 F.3d 168 (3d Cir. 2015) had extended this rationale from a demand letter to a formal pleading.  In both these cases the law firm was found to have violated § 1692e(2) by including not-yet-incurred legal fees and foreclosure costs in its letter, or complaint, respectively.  Applying the holdings in these two appellate cases, the District Court in Psaros found that including premium payments for a force-placed insurance policy that was allegedly not authorized would likewise constitute a violation of § 1692e(2) and therefore the court was required to deny the law firm’s motion for judgment on the pleadings. 

The lessons to be learned here are several.  Firstly, a servicer must pay careful attention to determine whether or not a loan is escrowed for taxes and insurance, and if not the servicer needs to have a failsafe system for ascertaining whether the borrower has a current and acceptable insurance policy in place.  Secondly, a servicer must ensure its various departments communicate with each other and timely update loan records.  Thirdly, a servicer must ensure its employees understand the difference between an escrowed loan and a non-escrowed loan and should alert its attorney which of the two types it has referred for foreclosure.  And, fourthly, a foreclosure law firm cannot simply take as gospel the debt information provided by the servicer.  The firm should include in its checklist the question whether the loan is escrowed, or not; and, when a servicer is seeking to collect premiums it has paid for a force-placed policy, the firm should inquire to ensure the borrower has not obtained a qualifying policy that obviates the need for a force-placed policy.   

While some may hope that this decision may be limited to the foreclosure process peculiar to New Jersey, it would not be surprising to see similar civil actions filed in other states. Presumably, any debt collector communication, whether by letter, debt affidavit, or formal legal pleading, wherein the debt collector misrepresents the character, amount, or legal status of any debt exposes itself to a claim under § 1692e.  Remember, liability is strict (intent is irrelevant) and the standard courts use to determine whether the borrower relied on the representation is that of the “least sophisticated consumer.”

Published by Hutchens Law Firm on April 5, 2016